Workers of the world: Invest!
Newton, Iowa — It’s a story familiar to many small cities and towns across the Northeast and Midwest: The major employer in town, facing intense foreign competition, is bought by a competitor whose first move is to close down the headquarters, shutter the factory and move the work to other facilities, or to cheaper plants overseas.
In 2007 it happened in this once-comfortable prairie town when Whirlpool snapped up Maytag, its rival in the business of making washers, dryers, dishwashers, stoves and refrigerators. For more than a century, ever since Fred Maytag came out with his first hand-cranked washer, Newton was Maytag and Maytag was Newton. Then, suddenly, it wasn’t, and in one cruel stroke, 1,500 jobs were eliminated.
We all know how this story usually plays out. Older workers slip into an embittered early retirement, young people start to move away, retail stores fail, housing prices decline, funding for schools begins to dry up. From the politicians and local chamber of commerce come brave talk about green jobs and biotech, but in the end all they muster is a new call center.
Jordan Bruntz was determined that wasn’t going to happen to Newton, at least not without putting up a fight. With two engineering degrees and an MBA, he was offered the opportunity to transfer to a good job with Whirlpool. But unlike so many business executives these days, Bruntz is burdened with a strong feeling of responsibility to the people who worked for him and the community they lived in. So, with seven of his colleagues, he began to see what any smart entrepreneurs would see — a bunch of experienced and committed workers who were anxious for a job, along with vacant facilities and unused machinery that could probably be acquired for a song. In other words, he and his colleagues saw a good business opportunity, and they took it.
Today, Springboard Engineering employs about 65 engineers and support staff in what used to be an old Kmart and an old Wal-Mart across from each other on Highway 6. They are helping nearly all of the world’s major appliance makers to develop, prototype and test new products. And they are branching out into home furnishings and consumer electronics. The company was profitable and promising enough last year that it was bought by Underwriters Laboratories, whose Good Housekeeping seal of approval sets the industry standards for reliability and safety. With UL’s reputation, capital and client list, Springboard is about to go global in a serious way. Today there are openings for eight employees.
Success was hardly guaranteed. Although Whirlpool was willing to give Bruntz a running start by selling him equipment and sending work his way, it took a lot of looking to find even one local bank willing to provide the needed start-up capital. The town of Newton offered some tax relief, and the state of Iowa stepped in with a low-cost loan.
But perhaps the greatest hurdle was getting a bunch of engineers comfortable with the risks associated with going out on their own.
Bruntz recalls making a presentation to the first meeting of the employee-directors to show that, if things broke their way, they would have enough business to keep busy for six months. At the next monthly meeting, the report was nearly the same: six months of work, but nothing beyond.
“It took a few more months of the same report before it dawned on us that this was what it meant to be in business for ourselves,” Bruntz said.
Springboard is hardly unique. There are hundreds of examples of laid-off workers who gave up waiting for someone else to come along and give them jobs and created their own jobs instead.
The most common model is when a plant executive or department manager like Bruntz — someone with business savvy and experience — takes the lead in raising the outside capital and striking a deal with the old company.
In other cases, it’s the employees themselves who provide much of the equity capital and own the company, often through a tax-advantaged employee stock option plan. Perhaps the most celebrated is Springfield ReManufacturing, which under the leadership of Jack Stack took a division of the failing International Harvester and transformed it into a multibillion-dollar enterprise in which every employee is encouraged to look in on the company’s financial statements and operating results. Stark’s “open-book management” has a cult following in the entrepreneurial community.
These days, there are even a handful of private-equity firms, such as South Franklin Street Partners in Cleveland and KPS Equity in New York, that specialize in manufacturing-sector buyouts with significant levels of employee involvement and risk-sharing.
If there is going to be a genuine manufacturing revival in the United States, however, my guess is that there will have to be many more Springfields and Springboards. It’s encouraging that companies such as General Electric and Master Lock are bringing high-value, high-wage work back to American plants. But if we have learned anything in the past two decades, it is that we can’t rely on the goodwill of global executives who are slaves to the latest management fad and loyal to no one other than their shareholders. Any revival of manufacturing needs to begin with entrepreneurial self-reliance.
Ohio has been a pioneer in this area with the Employee Ownership Center at Kent State University, which helps workers and managers put the pieces together for new employee-owned enterprises. This is often an exercise that founders on wishful thinking, and the center has a list of experienced advisers who help weed out unrealistic business plans while helping the good ones become reality. It’s a relatively inexpensive model that other states should explore.
The second hurdle is finding capital for the good ideas, made all the more difficult these days because so many banks have lost the knack or the appetite for making anything other than asset-based loans to established firms. That’s particularly true when employee ownership is involved. Federal bank regulators could certainly provide banks fewer disincentives than they now do for this kind of lending. If that doesn’t work, Sens. Sherrod Brown (D-Ohio) and Bernard Sanders (I-Vt.) have a proposal for partial federal guarantees of bank loans to employee-sponsored start-ups that might catch the bankers’ attention.
One final problem is resistance from the companies that have decided to shut down a plant but don’t particularly relish the prospect of competition from former employees who know their products, customers and processes. This can take the form of locking up old facilities and equipment, forcing exclusive contracts onto suppliers and distributors, and demanding noncompete agreements as a condition for severance payments. By outlawing such noncompete clauses and making judicious use of antitrust and eminent-domain powers, states could be a lot more aggressive in discouraging this anticompetitive behavior.
When the Brookings Institution issued its blueprint for a manufacturing revival this month, it was noteworthy that one of its four key recommendations was for “an increased role for workers and communities in creating and sharing the gains from innovative manufacturing.” Germany provides the model for how a high-wage country can still have a globally competitive manufacturing sector, and like most others who have studied it, the Brookings researchers found that employee involvement and gains-sharing is a key to that success. It’s also true here: The data are pretty clear that companies that have some level of employee-ownership have higher productivity and profitability than those that don’t.
The best way to revive American manufacturing isn’t to add yet another loophole to the corporate tax code, the latest lame proposal from the Obama economic team. It’s to reach beyond Wall Street and the corporate mind-set and tap into the ingenuity and the entrepreneurial instincts of the American worker.